U.S. Commerce Secretary Gina Raimondo stated on January 26th that the U.S. government will propose that American cloud computing companies determine whether foreign entities are accessing U.S. data centers to train artificial intelligence models.

The proposed “know your customer” regulation was made available for public inspection on January 26th and is scheduled for publication on January 29th.

According to a report from Reuters, Raimondo stated during her interview that, “We can’t have non-state actors or China or folks who we don’t want accessing our cloud to train their models.”

“We use export controls on chips,” she noted. “Those chips are in American cloud data centers so we also have to think about closing down that avenue for potential malicious activity.”

Raimondo further claimed that, the United States is “trying as hard as we can to deny China the compute power that they want to train their own (AI) models, but what good is that if they go around that to use our cloud to train their models?”

Since the U.S. government introduced chip export controls to China last year, NVIDIA initially designed downgraded AI chips A800 and H800 for Chinese companies. However, new regulations in October of 2023 by the U.S. Department of Commerce brought A800, H800, L40S, and other chips under control.

Raimondo stated that the Commerce Department would not permit NVIDIA to export its most advanced and powerful AI chips, which could facilitate China in developing cutting-edge models.

In addition to the limitations on NVIDIA’s AI chips, the U.S. government has also imposed further restrictions on specific equipment. For example, ASML, a leading provider of semiconductor advanced lithography equipment, announced on January 1st, 2024, that it was partially revoking export licenses for its DUV equipment in relation to the U.S. government.

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• [News] New Focus in the US-China Tech War! Can China Overtake with Silicon Photonics?
• [News] NVIDIA Rumored to Downgrade AI Chips for China Amid U.S. Restrictions, Year-End Mass Production Expected

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Negotiations between Hyundai Motor and the U.S. government concerning tax incentives for the Korean automaker’s USD 5.5 billion EV plant in Georgia have yet to reach a conclusion.

It was first reported on August 31st 2023, indicating that Hyundai Motor Group and LG Energy Solution (LGES) would invest an additional USD 2 billion in their battery cell manufacturing joint venture (JV) at the Metaplant in Bryan County, Georgia.

The company subsequently aimed to expedite the construction of its factory in Georgia and establish partnerships with local battery suppliers to align with the Inflation Reduction Act (IRA), as stated by Hyundai’s CFO Seo Gang-Hyun during an earnings call.

In an latter interview, Georgia Governor Brian Kemp expressed concerns that the IRA is adversely affecting Korean companies. Korea Joongang Daily further noted that no Korean electric vehicles, including those from Hyundai Motor and Kia, are currently listed for the IRA tax credit. According to TrendForce’s analyst, the market share in 2023 for Hyundai Motor and Kia combined is 10.6%, which ranks as 4th in the US market, behind GM, Toyota, and Ford.

Currently, the U.S. Energy Department has reportedly yet provided a definitive response to Hyundai’s request for a 30 percent tax credit under the IRA, as per a report from the Korean media outlet Korea Joongang Daily. As reported by The Korea Daily, the potential value of these incentives could be around USD 350 million.

“We’ve been constantly discussing with the U.S. government for the incentives,” Hyundai Motor confirmed regarding the news. “Nothing has been decided, and we’re waiting for the result.” Still, reportedly, Hyundai and Kia have not announced any cuts to EV production or investment.

TrendForce notes that the automotive industry is currently facing high raw material and labor costs, as well as significant investments in electrification and autonomous driving. Balancing the protection of local enterprises, maintaining competitiveness, and managing consumer costs is an urgent task for governments worldwide. Most countries are focusing on the country of origin rather than the brand of vehicles in their restrictive measures.

Measures taken by the US—specifically for EVs—include requiring that EVs and their batteries be assembled in North America. Furthermore, critical minerals in the batteries must originate from countries that have signed free trade agreements with the US to qualify for subsidies totaling US$7,500.

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• [Insights] Hyundai Defies Headwinds with 1.52 Billion Groundbreaking for Electric Vehicle Plant

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Despite the U.S. export control measures on semiconductor equipment, including those from the Netherlands-based ASML, a major player in advanced manufacturing tools, recent financial reports have contrastingly indicate a doubling of the revenue share from the Chinese market?

On January 24, ASML, a leading provider of photolithography equipment, released its latest financial results for the fourth quarter and the full year of 2023. In Q4 2023, the revenue reached EUR 5.683 billion, with China accounting for 39% of ASML’s total revenue. 

Source: ASML

Although slightly lower than the 46% in Q3, the annual perspective for 2023 reveals that China contributed to 29% of ASML’s revenue for the year. This marks a significant increase compared to the 14% revenue share from China in 2022, indicating a direct doubling of ASML’s revenue share in the Chinese market.

Source: ASML

ASML’s Chief Financial Officer, Roger Dassen, explained the significant increase in the revenue share from the Chinese market within a year during the interview accompanying the recent financial report. 

Dassen attributed the strong performance in China in 2023 to orders received at the end of 2022, which were executed throughout 2023. In the previous quarter, ASML had highlighted that the global order delivery rates, including the Chinese market, had been relatively low, below 50% over the past few years. 

He then emphasized that the demand from Chinese orders primarily comes from mid-critical and mature manufacturing, and this demand remains solid.

With the Netherlands imposing new restrictions on the export of advanced chip manufacturing equipment effective from January, ASML officially announced that starting from 2024, they would not be able to ship NXT:2000i and higher DUV lithography equipment to China.

Equipment below NXT:2000i, including NXT:1970i and NXT:1980i, would also be restricted from shipment to advanced process fabs in China. Dassen anticipated that this will impact 10% to 15% of sales in the Chinese market in 2024. However, he emphasized that this aligns with the financial forecasts provided in the third quarter of last year, and the demand for mature manufacturing processes remains robust.

For the full year of 2023, ASML reported a net sales revenue of EUR 27.6 billion, with a net income of EUR 7.8 billion and a gross profit margin of 51.3%. ASML estimates that the net sales for 2024 will be similar to those in 2023.

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• [News] ASML Reports Partial Revocation of Export Licenses for DUV Equipment
• [News] The Battle on Advanced Processes Intensifies as ASML Plans to Produce Ten Equipment Capable of 2nm Chip Production Next Year

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The Center for Strategic and International Studies (CSIS) in the United States published a new article on the January 12th, 2024, suggesting that the new battleground in the US-China tech war could be silicon photonics technology. This technology aims to enhance transmission efficiency, reduce latency, and reshape the competition landscape between the US and China in semiconductors and AI. 

According to TechNews’ report citing the author Matthew Reynolds’ notes in the article, unlike electronics, photonics uses photons instead of electrons to transmit information. When combined with electronic technology, photonics has the potential to create large-scale computing systems with higher bandwidth and energy efficiency, surpassing the physical limitations of traditional electronic chips.

However, the Chinese government has recently shown interest in photonics, seeing it as one way to bypass Western technological controls. Photonics technology is mentioned in China’s Outline of the 14th Five-Year Plan (2021-2025) for National Economic and Social Development and Vision 2035.

Yao Yang, the director of the National Development Institute at Beijing University, believes that US semiconductor restrictions are a “shooting themselves in the foot” because photonic chips will eventually make electronic chips obsolete.

He also sees this as an opportunity for China to overtake, asserting that China has the capability to take the lead in this emerging technology, as mentioned in his recent article.

However, Matthew Reynolds believes that it’s unlikely for photon chips to replace electronic chips, at least not in the near future. Photonics and electronics are more likely to coexist, forming a symbiotic relationship.

What is certain, though, is that silicon photonics technology holds the potential to become a breakthrough for China in advancing to the forefront of semiconductor manufacturing.

Reportedly, the most direct application of silicon photonics technology is in optical interconnects, replacing the copper wiring in circuits with photonics to speed the transmission of information between processors and/or memory, reducing the input/output bottlenecks currently plaguing AI computing.

In addition to optical interconnects, another application area for silicon photonics is in the emerging field of optical computing. Photon processors utilize light instead of electrons for computation. While their range of computational types is limited, they show significant promise in performing matrix multiplication operations, a crucial component, especially in large-scale language models, constituting over 90% of inference computations.

Chinese economist Chen Wenling from the China Center for International Economic Exchanges (CCIEE) stated in an article addressing the anti-American blockade that silicon photonics is the technology that China can use to overtake.

“China is preparing to build a photonic chip production line, which is expected to be completed in 2023, which means that China will be at the forefront of the world in terms of photonic chips, and even completely change the chip technology route. Photonic chips have many technical advantages. Its calculation speed is faster and its information capacity is larger, which will be more than 1,000 times higher than the current silicon-based chips.” Chen expressed.

Lightelligence, a U.S.-based optical computing company, previously received funding from the Chinese government and has recently launched the AI accelerator “Hummingbird.” Hummingbird utilizes optical interconnect components, connecting to chips manufactured by TSMC using 28-nanometer process.

Although this process may not be at the forefront of current technology, it aligns with China’s semiconductor manufacturing capabilities. Lightelligence even claims that its latency and efficiency metrics surpass those of competitors in certain AI tasks.

Additionally, Lightelligence has introduced the “Photonic Arithmetic Computing Engine” (PACE), an optical computing system. PACE integrates photonic and electronic components on a single chip and, in certain compute-intensive applications, boasts processing speeds 25-100 times faster than Nvidia’s high-end GPUs.

China’s SinTone Microelectronics is in the process of establishing a silicon photonics chip production line. Sui Jun, the president of SinTone Microelectronics, indicated that China has the capability to produce photon chips domestically because the manufacturing process does not require the use of extreme ultraviolet (EUV) lithography machines, which are subject to U.S. sanctions. 

Simultaneously, a research team at Tsinghua University in China announced a breakthrough in overcoming the traditional physical limitations of chips, presenting a new computational framework that integrates optics and electronics. They successfully developed the world’s first all-simulated optoelectronic intelligent computing chip (ACCEL).

In terms of computational power for smart visual target recognition tasks, ACCEL exceeds current high-performance commercial chips by over 3,000 times. In the realms of smart visual target recognition tasks and computations for unmanned system scenarios, its energy efficiency surpasses existing high-performance chips by more than 4 million times.

While the commercialization timeline for ACCEL remains uncertain, researchers believe it holds the potential for applications in unmanned systems, industrial inspection, and AI large-scale models in the future.

Silicon Photonics Poised to Transform the US-China Tech War and AI Landscape

Matthew Reynolds believes that silicon photonics is the foundation and driving force behind advancements in optical interconnects and optical computing, reshaping the competitive landscape in the semiconductor and AI industries between the US and China.

While US export measures aim to sever China’s capabilities in advanced chip manufacturing, silicon photonics appears to be a new opportunity for China to take a different path.

However, Matthew Reynolds notes that despite the promotion of photon processor performance, its current applicability remains relatively narrow, contrasting sharply with the universality of electronic processors.

Additionally, the application of silicon photonics technology still faces numerous technical challenges, requiring software development in operating systems and applications to enhance performance in optical computing.

Therefore, achieving optical computing may still require several years, or even decades. Given the current pace of AI development, any delays could have serious consequences. Leading semiconductor companies in the United States and allied nations are also investing heavily in silicon photonics. It remains uncertain whether China can secure a leadership position.

Matthew Reynolds points out that regardless, new technologies and architectures are likely to redefine the components of advanced chips. They may weaken the impact of existing control measures or reshape the competitive landscape.

The US export controls may inadvertently stimulate China to allocate more resources to emerging technologies, positioning itself as a key player in the next generation of semiconductors, especially as Moore’s Law approaches its limits and demand for AI computing continues to grow.

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• [News] Silicon Photonics Reshapes the Future; TSMC, ASE Ready to Seize Market Share

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The U.S. Department of Commerce has initiated the “National Advanced Packaging Manufacturing Program (NAPMP) ,” with materials and substrates being the first subsidized areas. Due to the close collaboration between IC testing and IC substrates, it is not ruled out that the IC substrate industry could be the next recipient of subsidies under the U.S. chip legislation.

However, according to Commercial Times’ report, there is a lack of interest among Taiwanese PCB manufacturers in establishing facilities in the U.S., and there are three main reasons for this. 

Firstly, the PCB industry thrives on economies of scale, and the production costs in the U.S. are too high. Taiwanese manufacturers have recently responded to the China Plus One Strategy by establishing facilities in Southeast Asia, making it unlikely for them to set up operations in the U.S.

Secondly, the U.S. is not particularly welcoming to polluting industries, making pure substrate manufacturers more likely candidates. 

Thirdly, domestic PCB manufacturers in the U.S. are also relocating their production lines. If seeking a partnership is necessary, Japanese manufacturers may present a more viable option.

As for potential subsidy recipients, industry experts speculate that one of the more likely beneficiaries could be TTM Technologies, a major PCB manufacturer in the United States. TTM announced in 2023 the establishment of a new facility in the state of New York dedicated to producing HDI PCBs, primarily for military applications in line with U.S. strategic requirements.

The United States plans to invest USD 3 billion in three main areas: an advanced packaging piloting facility, workforce training programs, and funding for projects. The funding is derived from the CHIPS and Science Act, and detailed information on the subsidy program is expected to be announced in early 2024.

In response to this news, the Taiwan Printed Circuit Association pointed out that the conditions for subsidies under the CHIPS and Science Act are stringent. In the past year, the semiconductor supply chain-related companies, led by foundry outsourcing, have started to establish a production presence in the U.S. This includes not only foundries such as TSMC, Samsung, and Intel but also packaging and testing facilities like Amkor and ASE Group.

The association highlighted that IC substrates are part of the semiconductor supply chain, but the more immediate impact is on packaging and testing facilities. If global packaging and testing facilities also take concrete actions to establish operations in the U.S. following the “whole chip” production mindset, the pressure on IC substrate manufacturing will undoubtedly increase. It is not ruled out that the IC substrate industry could be the next focus of the U.S. government’s attention.

While the production scale of IC substrates (or the overall PCB) in the U.S. may not be significant, once categorized as a strategic material, even small-scale production becomes meaningful.

In other words, establishing operations in the U.S. is not solely about scale but rather about companies having the “capability” to produce locally. Reportedly, the industry should pay attention to the future developments in U.S. policy in this regard.

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